September 11, 2014

Pay off your student loans in a variety of ways

In 2012, approximately 600,000 borrowers defaulted on their loans. Defaulting on your loans has the potential to ruin your credit score and subject you to serious financial problems. There are a variety of repayment plans. Choose the plan that works best for you. The following options are only available for federal loans, not private loans.

Standard Repayment Plan

If you do not choose another plan, you are automatically enrolled in this one, requiring that you make fixed monthly payments of at least $50 for up to 10 years. The benefit to this plan is that the loan is paid off faster, and less interest is paid as a result. The difficulty of this plan is that your monthly payments are higher in comparison to other plans. This plan works well for anyone who can afford the high monthly payments. As of June 2013, nearly 10 million people are on this plan. It is the most popular option.

Graduated Repayment Plan

This plan requires that payments start low, and increase every two years. The benefit of this plan is that the loan is paid off within 10 years. The difficulty of this plan is that more interest is paid over the lifetime of the loan compared to the Standard Repayment Plan.

Extended Repayment Plan

This plan gives two options within a repayment window of up to 25 years: You can either set fixed monthly payments, like with the Standard Repayment Plan, or you can increase the payments over time, as with the Graduated Repayment Plan. A benefit of this plan is that payments are smaller as they’re spread out over 25 years. The difficulty of this plan is that payments over a longer period of time accrue interest. This plan is good for borrowers who need lower monthly payments in exchange for paying more over the lifetime of the loan. Approximately 1.6 million borrowers currently take advantage of this option.

Income-Based Repayment (IBR)

This plan’s payments are capped at 15% of your discretionary income, and readjusted each year based on your income and family size for up to 25 years. To be eligible for this plan, you must qualify for a “partial financial hardship,” so that payments calculated under this plan would be less than under the Standard Plan. The benefit of this plan is that if you make regular payments, your debt may be able to be forgiven after 25 years. Also, if you work in public service, you could have some debts forgiven after 10 years. Additionally, the government will also pay unpaid accrued interest on certain loans for up to three consecutive years if your payments do not cover it. The downside to this plan is that you will have to provide annual documentation of your income to your loan service provider. You may also have to pay income taxes on the amount of debt that is forgiven after 25 years. Less than a million borrowers use this plan.

Pay As You Earn Repayment (PAYE)

This plan’s payments are capped at 10% of your discretionary income, and readjusted each year based on your income and family size. You must qualify for a “partial financial hardship.” A benefit of this plan is that your debt could be forgiven after 20 years. If you work in public service, you could have your debt forgiven after 10 years. Also, the government will pay your unpaid accrued interest for up to three consecutive years from the date that you start repaying your loans. In addition, interest is not capitalized unless you no longer have a partial financial hardship. The difficulty with this plan is that only those who have received a loan disbursement on or after October 1, 2011, are eligible, so if you graduated before 2011, you may be out of luck. Also, you must provide documentation of your income to your loan service provider. This plan may be beneficial for recent graduates who want to keep their monthly payments low. Graduate students may also appreciate this plan.

Income-Contingent Repayment Plan

This plan’s payments, made for 25 years, are based on your adjusted gross income, family size, and the amount of your loans. Your payments change as your income changes: You may either pay an amount based on a 12-year repayment plan that is multiplied by an income percentage factor of 20% or your monthly discretionary income. A benefit of this plan is that you can have your remaining loan balance forgiven after 25 years of regular payments. A downside to this plan is that you’ll have to pay more over the lifetime of a loan than you would with a 10-year plan, and you may have to pay income taxes on any forgiven debt.

Income-Sensitive Repayment Plan

This plan’s monthly payments are based on your annual income. For borrowers who do not qualify for an income-contingent plan, this income-sensitive repayment plan is an alternative. A benefit of this plan is that you are able to determine the percentage of your monthly payment—between 4% and 25% of your monthly gross income. The difficulty of this plan is that it is only available for up to five years. This requires you to switch to a new plan. This plan is best for those with lower incomes who want flexibility in setting their own repayment terms.

Eligibility for each plan depends on the types of loans that you have, so be sure to consult with skilled counsel or a financial advisor for more information.